Presented by Audrey Mwala, Director Project
Finance & Risk Analysis, The PPPC
ICAM Conference September 2014
4/11/2020
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Source: SADC Short-term Plan 2013 – 17
Presented by Audrey Mwala, Director Project Finance & Risk Analysis,
The PPPC
2

4/11/2020
• Infrastructure demand growth rate > traditional finances
• Traditional finance not enough for operations
• Need for Project
Finance
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
3

by E. R. Yescombe, 2007
Means of raising long term non-recourse debt financing for major projects based on lending against the project’s future cash flows and depends on a detailed evaluation of project’s construction, operating and revenue risks, their allocation between the investors, lenders and other parties through contractual and other arrangements .
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
4

Trend Analysis
• Loan against exiting balance sheet
• A going concern status
• Extrapolate from past performance
• Management has full control
• Recourse to company balance sheet;
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
5

• Government borrows to finance public infrastructure.
• Govt. may contribute its own equity
• Analyze govt.’s ability to raise funds
• Shows up as a liability on Government
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
6

4/11/2020
• Rich individuals or a group
• Retired entrepreneurs or executives
• Seed capital
• Management advice & contacts
• Bear extremely high risks
• A higher reward
• Invest beyond monetary return
• Equity or convertible debt
• A defined exit strategy
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
7

• Existing Company borrows
• Finance brown field project
• Full recourse on borrower
• Creditworthiness - historical & future
• Limited security perfection
• Pay interest in construction
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
4/11/2020 8

4/11/2020
• High upfront capital intensive assets, long lives.
• Greenfield project
• Used in most PPP’s
• Special Purpose Vehicle borrows
• Highly leveraged structure
• Non or limited recourse
• Bankability- NPV of future cash flows
• Capitalise interest in construction
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
9

4/11/2020
• Disbursementslender’s consent.
• Lenders monitoring
• Step in rights
• In large projects financiers appoint manager
• Lien-project assets, paid from project cash flows
• Debt repaid before the end of project life.
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
10

Stage
1
Stage
2
Preliminary negotiations
(Business Plan, Cash flow projections
Due diligence ( affordability, technical, Economic, Environmental , legal, financial, commercia l
)
Procurement/Bidding
Contract negotiations
Contract Signing
Financial closure (
Sale and Purchase Agreement, concession,
Construction, FM agreement, Conditions precedent, Architects, Contractors,
Project Management team, Marketing team)
Stage
3
• Construction
• Service delivery
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
11

4/11/2020
• During Construction Period:
LIBOR + X%
• During Project Operation:
LIBOR + X% -1%
• Typical Upfront Fees : X
• Arrangement Fee – Once off
Documentation Fees
• Legal Fees
• Commitment Fees –X% p.a. on undrawn amount ™
• Administration Fees
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
12

• Construction, operating and maintenance expenditure
• Principal &Interest senior debt
• Senior debt service reserve account
• Interest subordinated debt
• Principal on subordinated debt
• Maintenance Reserve Account
• Shareholder subordinated loans
• Distributions to shareholders
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
13

Revenue
DSCR =
EBITDA
----------------=>1.5
Debt Service
Operating Income or
EBITDA
4/11/2020
O & M
Expenses
Debt Payment
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
Taxes Profit
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• Debt Service Cover Ratio (“DSCR”)
• Loan Life Cover Ratio (“LLCR”)
• Project Life Cover Ratio (“PLCR”)
• Cash flow waterfall priority
• Major Maintenance reserve account >X
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
15

4/11/2020
• Lending based on financial modeling of investment, cost & revenues.
• bankability based on key assumptions
• Sensitivity & scenario analysis used to draw the comfort lines
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
16

4/11/2020
• Project duration
• Initial Capital plus additional capital
Demand volume
• Price
• Unit cost
• Overheads
• Inflation
• Discount rate- Cost of total capital
• Interest rate
• Debt repayment
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
17

• A special entity created for project, shields other sponsor’s assets from project failure.
• Has no assets besides the project.
• Sponsors capital contribution assures lenders of the sponsors' commitment.
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
18

Project sponsors
Special Purpose Vehicle
Contracting Authority
Marriage contract e s f e
Unitary payments
The Special
Purpose Vehicle
Payment
Contract
Monitoring
Construction firm
Government contracted certifier
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• Equity- for new or same line of business
– Pure equity or Quasi equity, Preferred equity, Shareholder loans
• Pension funds- matches with pension obligations
• A 'syndicate' of lending institutions
– Senior debt, Second lien debt, Mezzanine debt, Convertible debt
• Bank loans (usually short term)
• Construction companies @ risk capital
• Infrastructure Bonds- based on project cash flows
• Revenue Bonds- used by municipals
• Securitization – receivables used to float a bond
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
20

4/11/2020
• Infrastructure projects are inherently risky.
• A project may be subject technical, environmental, economic and political risks.
• Risk identification and allocation is a key.
• Project financing is distributed among multiple parties, so as to distribute the project risk.
• Financiers institutions at times conclude that the risks in a project are unbankable
• Riskier projects may require limited recourse
financing, a surety from sponsors
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
21

4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
22

• Hypothetical, risk-adjusted, cost of govt. doing a project.
• Expressed in present value
• Testing private party bid for value for money.
• Helps to ascertain full life cycle cost of the project.
•
•
•
PV of Govt.’s future revenue : equals or exceeds present value of future capital & current expenditure
Whole life cycle costs
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
23

4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
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4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
25

4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
26

Value for Money
• Present Value of PSC less Risk adjusted private bid
• Monitor VM during tender, construction & Service delivery
Develop a
PSC Compare with shadow price
If PSC price> shadow bid, then proceed to tender
Compara tor bid price with PSC
Develop a
Shadow bid
• Significant shift of VM might be ground for renegotiation
Monitor the value for money throughout the project life
4/11/2020
Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
27

Value for Money=
• NPV of PSC $149.9m less
• NPV of PPP bid $121.1m = $28.8m
4/11/2020 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 28

$170
$100
$149.9
$135
$121.1
$14.9m
$28.8m
4/11/2020 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 29

Presented by Audrey Mwala, Director
Project Finance & Risk Analysis, The PPPC
4/11/2020 30